Strategic behaviour in a capacity market? : the new Irish electricity market design
|Author:||Teirilä, Juha1; Ritz, Robert A.2|
1Department of Economics, University Oulu, Finland
2Judge Business School & Energy Policy Research Group, University of Cambridge, UK
|Persistent link:|| http://urn.fi/urn:nbn:fi-fe2021061838720
International Association for Energy Economics,
|Publish Date:|| 2021-10-15
The transition to a low-carbon power system requires growing the share of generation from (intermittent) renewables while ensuring security of supply. Policymakers and economists increasingly see a capacity mechanism as a way to deal with this challenge. Yet this raises new concerns about the exercise of market power by large players via the capacity auction. We present a new modelling approach that captures such strategic behaviour together with a set of ex ante empirical estimates for the new Irish electricity market design (I-SEM) — in which a single firm controls 44% of generation capacity (excluding wind). We find significant costs of strategic behaviour, even with new entry: In our baseline scenarios, procurement costs in the capacity auction are around 150–400 million EUR (or 40–100%) above the competitive least-cost solution. From a policy perspective, we also examine how market power can be measured and mitigated through auction design.
|Pages:||105 - 126|
|Type of Publication:||
A1 Journal article – refereed
|Field of Science:||
This study is funded by the Fortum Foundation and the Strategic Research Council, Finland, Project No. 292854.
© 2019 International Association for Energy Economics. Published in this repository with the kind permission of the publisher.